In my 18 years of helping small-business owners
get started, most of my clients have failed.

Wait! Don't go!

I really do give good advice. It's just that
the majority of startups fail within five years. Although I improve
my client's chances for success, many still falter -- and over and
over again, it's for the same reasons. The same issues always arise,
usually in combination, with most of my clients trying to start
a business. I've boiled them down to 10.

If you know these 10 things below, you'll greatly
improve your chances of being one of the successes.

1. Oh,
those darn business plansI don't think I ever met any startup
that wanted to go through all the steps required to write a substantive,
and thorough business plan. For the most part, the only time most
small-business owners develop a business plan is when they need
money. Frankly, no commercial lender, venture capitalist or other
full-time investor will consider a startup without a plan. Worse
yet, existing entrepreneurs generating positive cash flow and profit
think they don't need one. They do. I dare say most will learn of
lost sales/profit potential and unnecessary waste in expenses if
they did put a legitimate plan together.

2. Income and cash flow statementsWhen I first meet clients, I would venture
to say that fewer than one in 10 can interpret, much less comprehend,
the full value of financial statements. Most don't know how these
monstrosities of bookkeeping and accounting are even put together.
They just give their cigar boxes full of receipts to the accountant
and pay to have financial statements assembled for a lender or the
IRS. Financial statements are numeric, monetary monitors of financial
performance, stability and worth, and barometers of impending success
and failure. Take the time to find a book that uses simple terminology
to explain what the statements represent, how they are put together
and how you can read them to measure your financial performance.
If you will put in the time to understand them, they become extraordinarily
valuable tools that help control budgets and polish marketing strategies.

3. When to spend a buckA common mistake by some entrepreneurs
is to make spending decisions without considering their impact on
the company's sales and profit margins. Bottom line: Don't spend
a dollar unless you can reasonably expect that it will result in
a return of more than a dollar. For example, I recall a client who
wanted to purchase certain items for his office because they would
look pretty and appealing to clients. He suggested that creating
appeal in the minds of clients would better help him to make a sale.
The trouble was, the overwhelming majority of clients would be met
in the field. The primary reason for his office was to house operations.
He was going to spend money on items for the office that he could
not even indirectly justify as resulting in increased sales.

To use another example, if hiring a receptionist
to answer the phones allows you more time to make sales, then be
certain the increase in sales pays for the receptionist's salary,
benefits and any other related expenses, and still increases net
profit after expenses. Again: Want to spend a buck? Show me more
than a buck coming back.

4. Bankers vs. venture capitalists:
What's the difference?I'm amazed at the number of otherwise-bright
people who can't understand why they get turned down by commercial
lenders. Think of it this way. Most of you deposit money in a bank.
The bank uses your money to issue loans. Do you want them to take
big risks using your money, and possibly losing a big chunk of it
on defaulted loans? If a loan defaults, the bank loses revenue and
the cost of its services to you will rise. Simply stated, banks
can't take much risk. On the other hand, venture capitalists invest
their own funds, take higher risks, but there's a steeper price
to pay. VCs expect to make a higher return on their investment (ROI)
than a bank, they likely expect a percentage of ownership interest
and expect that higher ROI in a shorter period than a typical banker.
That's the difference: Higher risk means a higher interest on loan
proceeds over a shorter period.

5. Grants aren't free moneyIn the last few months there have been
many inquiries about grants to start small businesses or to finance
related expenses. Andrew Klesko's books and late-night TV ads have
heightened that awareness and created a perception that the government
has tall stacks of money it will hand out to anyone who asks. In
fact, two of the most commonly known and used programs relate to
hiring specific types of individuals who will learn a new trade
on the job. In turn, the employer can receive a refund on a certain
portion of the employee's wage during the specified training period.
Another federal program offers tax deferments to the employer under
similar on-the-job training conditions.

But as far as grants are concerned, nothing
comes free. There are strings the size of aircraft carrier ropes
to these programs. The grantee has to fulfill certain conditions
and milestones to qualify for and receive grant proceeds. In some
cases it is likely you will be reimbursed after paying the costs
from your company's funds. In other cases, low-interest loans are
awarded only if you're willing to set up shop in economically depressed
regions. Conditions, goals, milestones and reporting procedures
are very precise. In some instances you will not receive the proceeds
if these parameters are not met. Government agencies are very careful
about these matters. Regarding small business, most grants will
likely require job creation, retention, minimal income standards
for the jobs created and business location.

6. The SBA is not a last
resort.Since time eternal, many entrepreneurs,
when believing a commercial lender will not consider their loan
application, have envisioned the Small Business Administration as
the place to go to get money. It is one of the most distorted perceptions
I continuously address. Only in a few specialized programs do loan
proceeds originate with the SBA. The overwhelming majority of programs
and loan proceeds sponsored by the SBA come from commercial lending
institutions and Certified Development Corporations. For the most
part, the SBA serves as a guarantor to the lender. If you go belly
up and default on your loan, the SBA will pay the lender back --
somewhere between 75 percent to 90 percent of the loan. That cuts
the lender's risk, but the lender is still the bank or other financial
institution -- not the SBA.

So when you begin the loan application process,
think of the rigid standards of the process imposed by the bank.
Gauge the value and worthiness of your application by those standards.
If the SBA is brought into the process, that is because the lender
perceives some risk, but low enough that the SBA would be willing
to issue a guaranty against that loan. In short, you'll still have
to jump through all the bank's hoops to get your money, but with
the SBA you won't have to jump quite as high.

7. Market
research begins with common sense.If you're in a big metropolitan area,
you can get lost in a flood of data when trying to conduct market
research. If you're in a small town or rural area, you can die of
thirst. That's just the way it is. Big metro areas -- and well-organized
industries -- get the most-specific market data. However, there
are some common-sense rules of thumb you can use to conduct your
own local market research. Gather your data by the type of product
or service, the type of customer, the geographic target market,
pricing and promotional strategies. Furthermore, examine all your
competitors. Look to the successful competitors for the right things
to do, and examine the poor competitors to learn what not to do.
Readily available sources of data can include demographic and economic
census data from the Bureau of the Census, the local Yellow Pages,
business directories, colleges, universities, chambers of commerce
and economic development agencies.

8. Your customers are online
-- are you?Although the Internet bubble in the economy
has burst, don't expect the Web to wither. So make sure to look
at the Web in a clear-eyed fashion. It's not the path to sure riches
and it's not some fad with the lasting appeal of knickers. It's
somewhere in between. Make sure you keep track of the developments
in the industry and steer a middle course. Don't get intoxicated
by its possibilities if you're a local pizza shop. Don't ignore
the possibilities for global growth if you're in the service sector.

9. When
and where to advertise.A common error among startups is to squander
money in the wrong advertising media and promotional strategies.
I often have had to redirect clients who wanted to throw a large
percentage of their precious startup cash into newspaper, radio
or TV ads. Of course, there are conditions under which it makes
sense to advertise in these media. For example, retail tire outlets
can be found advertising in the newspaper. But accountants don't
do that. The lawn maintenance trade doesn't advertise on TV, but
does rely heavily on referrals from existing clients. Pool maintenance
people will often leave flyers at your door if you have a pool,
but an accountant won't do that. Use common sense. Where are your
typical clients most likely to be found? What kind of budget do
you have? What promotional and advertising strategies do your successful
competitors use?

10. Home-based businesses
-- look out for the pitfalls.Home-based businesses are sprouting up
all over. It's economical, convenient, saves gas, travel time and
serves the purpose well if conditions exist in the home for an office
that can receive clients if necessary. But beware of the possible
pitfalls. Advise spouses, children or significant others that regular
business hours at home, barring emergency, do not necessarily make
you more available for family or home chores. Keep the family out
of the office. It is not an extension of the family environment.
If you want to take advantage of tax exemptions, read up on IRS
requirements. There are advantages, but they come with obligations.
Finally, if you can get your work done in sleepwear, that's fine.
But if not, then try and wear some minimally casual clothes that
give some sense of orderly responsibility and discipline to the
work tasks at hand.

-- Posted:
Dec. 27, 2000

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